Japan PM's "Third Arrow" reforms seen short of overhaul

TOKYO May 16 Anyone expecting a broad overhaul
of Japan's economy that would remove barriers to competition
will likely be disappointed when Prime Minister Shinzo Abe
launches his "Third Arrow" policy next month, but those with
more modest expectations may be pleased.

Abe has promised to make structural reform and deregulation
a key part of his growth strategy, the third tranche of his
"Abenomics" prescription after hyper-easy monetary policy and
big spending.

The monetary and fiscal stimulus has already sparked Japan's
fastest economic growth in a year in the first quarter, but
corporate investment has yet to follow suit.

"The 'Third Arrow' was never going to be a magic bullet
because deregulation means changing behaviour and moving from
vested interests to new entrant investment," said Jesper Koll,
head of Japanese equities research at JP Morgan in Tokyo.

"But they are pushing ahead. There is a growth strategy. The
radical stuff is out and it was never going to be there, because
you are in a country that is obsessed with creating a
Japanese-style capitalism rather than market fundamentalist,
Anglo-American-style capitalism. It's still Japan."

Some fresh details of the strategy could be revealed on
Friday, when Abe is set to speak to business executives and
academics. He unveiled some plans last month, including steps to
make it easier for women to work.

Proposals by a panel on industrial competitiveness and
another on regulatory reform are likely to form the bulk of the
growth strategy. Abe, who took office in December after his
Liberal Democratic Party's (LDP) election win, says he wants to
announce the policy ahead of a June 17-18 Group of Eight summit
in Northern Ireland.

Among proposals that are seen as positive are plans to
deregulate the energy sector by breaking up utilities' grip on
the generation, transmission and distribution of electricity;
setting up a U.S.-style National Institute of Health to
consolidate and prioritise medical science investment, and Abe's
decision in March to enter talks on a U.S.-led free trade pact.

"Right now, I'd give them a 'B' for where they are and it
could end up anywhere from an 'A' to a 'D' depending on how they
follow through," said Byron Sigel, a former U.S. trade official
who negotiated trade deals with Japan in the 1990s.

"It's all in the implementation, and how much political
capital people are willing to spend to make tough structural
adjustments - and they will be difficult."

GOOD INTENTIONS?

Japan has a long history of crafting economic reform
packages full of bold prescriptions and good intentions, many of
which have ended up as empty promises. This time Tokyo is under
international pressure to follow its hyper-easy monetary policy,
which has so far escaped criticism despite the yen's dive, with
reforms to ensure sustainable growth.

Those longing for sweeping changes, however, look set to be
disappointed by decisions to put off politically painful
measures, at least until after a July upper house election that
Abe's LDP needs to win handily to ensure that policy proposals
are quickly followed by legislation.

"They are not touching the vital points, such as medical
care and agriculture," said Junji Annen, a Chuo University
professor who sits on the deregulation panel. "Utilities' reform
is coming out better than expected, but that is a sign of the
times," he said, noting that the clout of the politically
powerful utilities had been weakened by the Fukushima nuclear
disaster.

The package is expected to contain a target of doubling
Japan's miniscule agriculture exports to 1 trillion yen ($9.76
billion), a target Abe may mention when he speaks on Friday.

But it is likely to put off steps to ease barriers to
corporate investment in farming in a nod to a heavily protected
farm lobby, already upset by Abe's decision to join talks on the
U.S.-led Transpacific Trade Partnership pact.

"It is true there are certain sensitivities because of the
upper house election," Takeshi Niinami, CEO of convenience store
chain Lawson Inc and a member of the competitiveness panel, told
reporters this week. "Agriculture is one such issue."

Others areas where the package is likely to come up short
are steps to free up Japan's rigid labour market to make it
easier for firms to shift to growth industries from depressed
sectors, improvements in corporate governance and addressing the
question of immigration to make up for Japan's shrinking
population.

Niinami, for one, held out hope that touchy topics would be
taken up after the July election, but Chuo University's Annen
took a more pessimistic view. "They won't drop these topics
altogether but the question is will they continue (debate)
vigorously, or reluctantly?" he said.

"It is entirely possible that the LDP wins the election by a
landslide and just goes back to its old ways of catering to
vested interests."